the three student loan crises

Among higher ed policy folks, there’s a counter-conventional wisdom that there is no student loan crisis. For the most part (the story goes), student loans are a good investment that will increase future wages, and students could borrow quite a bit more before the value of the debt might be called into question. Indeed, some have argued that many students are too reluctant to borrow, and should take on more debt.

Just this month, two new pieces came out that reiterate this counter-narrative: a book by Urban Institute economist Sandy Baum, and a report by the Council of Economic Advisers. Yes, everyone agrees the system’s not perfect, and tweaks need to be made. (Susan Dynarski, for example, argues that repayment periods need to be longer.) Fundamentally, though, the system is sound. Or so goes the story.

What can we make of this disconnect between the conventional wisdom—that we are in the throes of a student loan crisis—and this counter-conventional story?

To understand it, it’s worth thinking about three different student loan crises. Or “crises”, depending on your sympathies.

First, there’s the student who has accrued six figures of debt for an undergraduate degree. Ideally, for media purposes, this is a degree in women’s studies, art history, or some other easily-dismissible field. The New York Timesspecializedinthese for a while.

Since student loan debt is not bankruptable, these people really are kind of screwed, although income-based-repayment options have improved their options somewhat. And they make for a dramatic story—as well as lots of moralizing in the comments.

Second, there’s the student who took on debt but didn’t finish a degree. These people often struggle, because their income doesn’t go up much, if at all. In fact, the highest default rates are among those who left school with the smallest debts (< $5000), presumably because they didn’t graduate.

These folks disproportionately attend for-profit institutions, whose degrees have less payoff anyhow, but even more importantly, have abysmal graduation rates. (Community colleges have low graduation rates too, but they’re a lot cheaper.) The debt-but-no-degree people are also kind of screwed, although again, income-based repayment plans can help them a lot, as would a bankruptcy option.

So we’ve got the crisis of people who borrow too much for a four-year degree, and the crisis of people who borrow a little, but don’t complete the degree, often because they’re attending a school whose entire business model is to sign up new students for the purpose of taking their loan money.

These are both problems—even “crises”—but they are solvable. For the first, cap federal loans (including PLUS access) for undergraduate degrees, and make all loans bankruptable, so private lenders are leerier of loaning large amounts to students.

For the second—well, I’d probably be comfortable eliminating aid to for-profits, but let’s say that’s beyond the political pale. Certainly we could place a lot more limitations on which institutions are eligible for federal aid, whether that’s tied to graduation rates, default rates, or some other measure. And, again, making student loans bankruptable would help people who really needed to get a fresh start.

Wait, so what’s the third crisis?

The thing is, these two “crises” may be devastating to individuals, but in societal terms aren’t that big. The six-figure-debt one really drives policy wonks crazy, because every student debt story in the last ten years has led with this person, but the percentage of students who finish four-year degrees with this many loans is very small. Like maybe a couple of percent of borrowers small.*

Proponents of the Counter-Conventional Wisdom (C-CW) take the second group—those who borrow but don’t finish a degree—more seriously. This group is often really hurting, despite having smaller loan balances. But they only make up perhaps 20% of borrowers, and since their balances are relatively low, an even smaller fraction of that $1.4 trillion student loan figure we hear so much about.**

The real question—the one that determines whether you think there’s a third crisis—is how you react to the other 75-80% of borrowers. The C-CW crowd looks at them and says, eh, no crisis. These folks come out with four-year degrees, $20 or $30,000 of government-issued student loan debt, will pay $300 a month or so for ten years, and then move on with their lives. We could argue about how much of a burden this is for them, but it’s clearly not a crisis in the same way it is for the NYU grad with $150k in loans, or for the Capella University dropout trying to pay back $7500 on $10 an hour.

This C-CW is based on the premise that 1) college is a human capital investment that is worth taking on debt for up to the expected economic payoff, 2) individual borrowing is a reasonable and appropriate way to finance this investment—indeed, more sensible than paying for the costs collectively—and 3) as long as debt is kept to a “manageable” level (as indicated by students not going into default and having access to forbearance when their income is low), then there’s no crisis.

Why this understates the problem

I take issue with this position, though, on at least three fronts.

1. “Typical” student debt is increasing .

Individual borrowing levels are still rising rapidly, and there’s no reason to think we’ve neared a max. A recent Washington Post editorial cited the CEA report as saying that “[t]he average undergraduate loan burden in 2015 was $17,900.” But that’s not what the average graduate holds. That’s what the average loan-holder holds, including those who have already been paying for a number of years. Estimates for the average 2016 graduate, by contrast, are considerably higher—in the $29,000 to $37,000 range—and growing. The fraction of all students who borrow also continues to increase.

College costs keep rising. State budgets are still under pressure. The penalties for not completing college keep increasing. We can only expect loan sizes to continue to go up. At what point does “reasonable borrowing” become “unreasonable burden”? And tweaks like expanding income-based repayment or extending the standard repayment period won’t bend the curve (to borrow from another debate)—if anything it will enable the further expansion of lending.

2. We are all Capella now.

These debates often overlook the effects of federal aid policy on colleges as organizations, something I’ve written about elsewhere. (The exception is the attention given to the Bennett hypothesis, which suggests that colleges will simply turn federal aid into higher tuition prices.)

But that doesn’t mean organizational effects don’t exist. Continuing to shift the cost burden to individual students is going to accelerate the already intense pressure on public colleges in particular to recruit and retain students, because with students come tuition dollars.

The drive to attract students is already undermining a lot of traditional values in higher education. It encourages schools to spend money on marketing and branding, rather than education. It promotes a consumerist mindset among students who quite reasonably feel that they have become customers. It encourages schools to develop low-value degree programs simply to generate revenue, and recruit students into them regardless of whether the students will benefit.

The values that limit colleges from doing kind of thing are what separates nonprofits from for-profits in the first place. If they go away, we all become Capella. And allowing “reasonable” lending to keep expanding moves us straight in that direction.

3. It gives up on actual public education.

Ultimately, though, the biggest problem I have with this position is that it concedes the possibility, or even the value, of real public higher education entirely. It doesn’t matter whether that’s because the C-CW sees it as a pipe dream, or because it sees it as an irrational use of public funds, since individuals benefit personally from their education in the long run.

This post is already too long, so I won’t go into a detailed defense of public higher ed here. But I do want to point out that if you accept the premise of the C-CW—that student loan debt will only become a crisis if it increases individual costs beyond the returns to a college degree—you’ve already given up on public higher education. I’m not ready to do that.

* This number is actually surprisingly difficult to find. In 2008, it was only 0.2% of undergrad completers, but average debt for new graduates has increased about 40% since then, so the six-figure camp has undoubtedly grown.

** Again, exact numbers hard to pin down. 15% of beginning students who borrowed from the government in 2003-04 had not completed a degree six years later, nor were they still enrolled. This figure has doubtless increased as nontraditional borrowers—who are less likely to finish—have become a bigger fraction of the total pool of borrowers, hence my 20% guesstimate.

33 Responses

Beth, as always, terribly fascinating. There might be a fourth category that you don’t cover, which in many ways worries me even more: graduate and professional school debt. Jordan Weissmann has covered this beat pretty well for Slate (e.g., here).

As I was thinking through the implications of your post, I started trying to think about reverse-engineering the problem. What would be a reasonable amount of debt (and include $0 in the options)? What value do we want to see? What would be positive outcomes? Negative ones? I’m not sure that I have good answers to these questions at a policy level. I certainly know what I hope for my kids, but also know that what I want for my kids might not be the optimal solution for the country. Do you have any thoughts on this, as someone who has thought a lot harder about this question than most people that I know?

My biggest problem with reporting on student loan debt–aside from the ignorance about your problem #2–is that average debt levels reported are always average debt levels FOR THOSE WHO HAVE LOANS. But a pretty sizable percentage of students–including of the lower-income students at colleges like mine–do not take out loans (at my institution in 2014-2015, 87% of students received financial aid, but only 66% took out loans). I don’t say this to minimize the problem of student debt, but if we are going to talk about average debt we should be clear about whether we are talking about the average STUDENT or the average BORROWER.

Incidentally, FWIW, students who fund their education with loans seem to end up with, on average, higher-paying jobs than those who receive merit aid, in part due to avoiding lower-pay fields like education and social services. So, to whatever extent institutions are to be evaluated using performance-funding metrics related to average graduate salaries, ensuring that students graduate with loans might actually be a better strategy. One might see this as a good argument against such performance metrics. (See http://sites.northwestern.edu/slc890/files/2015/09/Download-Job-Market-Paper-PDF-274452u.pdf).

Great point about the grad loans, Mike. Interestingly, default rates on grad loans are much lower than on undergrad, so most policy types worry less about them. But I wonder if that will change as fewer of them go to MDs, JDs, and MBAs, and more to people who get an MA in a random field because of credential inflation.

I’m working with a terrific grad student, Abby Stivers, who has almost finished interviewing 60 lawyers about their student loans for her dissertation. One theme that comes out is how critical — but also constraining — the public service loan forgiveness program is for many of them. Another is how little calculative thought goes into debt decisions, even for those who started law school post-2008.

Reasonable debt: Good question. I’m not sure I have a firm number in mind. At first I was going to say “enough to cover living expenses” but that’s probably $50k minimum right there for four years, if you don’t live with parents. I finished my BA (a long time ago) with the current equivalent of $12k, which felt significant at the time — certainly like I had a stake in it — but would be very little now. Maybe we should be looking at empirical effects of various levels and backing out to something reasonable.

Mikaila, good reminder. I think it’s now 70% of BAs who graduate with loans, which is much higher than a decade ago. That’s interesting about the jobs taken. I think evidence about other kinds of impact are mixed — some that it affects completion, but not so decisive.

The student loan debt in this country is fueled by the abuse of FOR PROFIT vocational colleges, AND Community Colleges the are using the student loan money in a way that doesn’t provide a return and thus the student defaults on the debt. Then we as tax payers are left with the unpaid debt. The way to stop this cycle is to rebuild the oversight of what institutions are qualified to use student loan resources.

Let the students continue to waste their loans on holidays and expensive clothes, constant expensive drinking and day trips, because that is where most of it goes.
# Most students don’t pay their loans back.

Student debt is an enormous problem for those with debt and deterred from education due to education costs regardless of how we spin the numbers. Some of this problem originates with the schools themselves. Originally community colleges were seen as a way to provide 14 years of free or low cost public education. These institutions have instead sought to become more traditional with expanded programs and costs. Some of the more recent for profit schools are a revenue generating business and schools in name only. Please do not give up.

Too little attention is paid to why a person goes to college and whether it’s appropriate for them to do so. I think that the purpose of a college education is to create an educated individual who can function intelligently in the modern world. It should not be a trade school. When I taught in university I found that many students were not ready for college and didn’t have a clear idea why they were there. I dislike the idea that everyone should go to college. This relates to student debt because someone who is contemplating college should plan carefully (with good guidance) his/her reasons for going, where to go that is affordable, and how it will be paid for. For too many college is essentially an extension of high school, and that doesn’t work well.

To Wizard Tom who said, “Let the students continue to waste their loans on holidays and expensive clothes, constant expensive drinking and day trips, because that is where most of it goes.
# Most students don’t pay their loans back.” – You are CLUELESS. Might want to read a book and learn something before making such ridiculous comments. I came from a working class family. Worked multiple part time jobs each semester to make ends meet- books, TOILETRIES, FOOD… my parents were not sending me spending money, so I did what I had to do. I NEVER enjoyed a spring break or a summer vacation. I was always working or taking classes or doing a research project. And you know what??? I personally know many people, who were doing the exact same thing in college. Not every young person who goes to college is an entitled, spoiled brat. Some of us actually go to LEARN and WORK HARD because we bought the lie we were sold… that any young person willing to do the work, can invest in their education and “make it.” Whatever that means. What did we make exactly? A mountain of debt we’ll be paying back until we’re retired or possibly beyond that.

To even have free public school education whereby even going to college is the wrong idea, for taxpayers should not pay for a child’s education that is not their own.
it is truth that all parents should be held accountable and responsible for the education of all their own children. What i mean here is no entitlements for anyone at all.
there is something called home schooled education that is the best of them all, for a child learns more and fast, plus better if they are even homed schooled.
Myself I have three college degrees and I had to pay for them myself with no help from my parents or any government help. I did it by using grants, scholarship, and other sources by not even taking out any student loans at all, or government aid.
Free public school education does mean that our taxes will go up to about 89% and that would have a 4% margin of era. Free College education would translate to raising taxes by about another 97% with a margin of era of 4% on the federal level. Which is illegal under U.S.Const.art.I §8 cl.1-20 and under U.S.Const.amend.X too
I would like to ask the taxpayers out there this question please.
Do you want to have your taxes go up to 97% higher or not?
By the way I grew up coming from living in poverty to where my parents just could not read, and going to college was not in the cards for me at all. I would like to say I also have been discriminated by The University of Wisconsin, and told I was to poor and my parents just could not even read, and the one reason was that I am a male that was a Veteran too. So you can see my college education was not to even happen at a public University. So I when to a private university and found out I just paid 5% more and I gotten a much better college education then i would of if I even went to a pubic University.
In matter of fact I now own a business and was interested in hiring someone I would never hire anyone that did graduate from a public university, because the number one thing is that person was never been properly educated at all, In addition I know that those that are educated by any public school education do not have any skills even needed to even preform the job at all.The case that I was discriminated by the University of Wisconsin so much is the main reason why.
Marxist like Hillary Clinton just love the idea of raise taxes to a 97% just to say this is how to payer public school education.
Now for this question.
Is raising taxes to 97% a good idea in order to pay for public school education even on the college level or not?
Just think about the 3% of your income to live on when you answer that question.
Thank You

Reading a post like this makes me feel like a loser. I don’t know maybe I’m just one of a kind… but I don’t think I am. I think there are a lot more people out there that are underemployed with college degrees…

Working for a student loan servicer it is nice to for once see an article that high lights the entire truth and doesn’t point the blame to the servicer as being the problem. Schools are adding luxury attractions that are not necessary for the students education and increasing tuition prices to lure in young adults who are excited to be leaving home for the first time and borrowers of parent plus loans have it the worst. Many parents are willing to take on a huge amount of debt if it means their child can go to college – unfortunately though they don’t qualify for things such as Income Based Repayment plans without jumping through hoops and nearly defaulting in the process. There is also the misconception that a Parent Plus loan can be transferred into the students name once they graduate which is false. Many times elderly parents are even tricked into signing on for thousands of dollars that they are unable to pay back. Personally, I think a good place to start when it comes to minimizing the burden of student loan debt is in high schools. Teenagers are taught to sit down, shut up and raise their hand to speak for 12 years and then rushed out the door to take on adult responsibilities such as debt. If high schools could incorporate curriculum regarding debt and money management I think students would be in a much better place, but I also agree with the solutions you described in this post!

I loved your blog. I understand it as the person who went to private school got screwed and told whoops you don’t have money to finish undergrad and now I’m paying out of pocket. Now I’ll be moving on to law school and probably owe my soul, left kidney and my first born by the time I’m done. I love the there’s no student loan crisis, maybe I can direct my belief or Navient to call them instead of me to discuss the terms of my loans and the 80282737 reminders the jig is up in about 2 months.

Another part of the problem is that when you do get your degree some disciplines make it harder to get jobs even after you graduate. For example: I know a person who got a two year degree as medical assistant. Most places if not all require you to be certified. Now you have to take a test at around a $100.00 a whack. And they make the tests so difficult that you can’t possibly pass them. I know a person that took the certification test 3 times and missed by less than ten points. They just gave up. Now they still have a $10,000.00 government loan they have to pay back with no job in that field.

FAFSA student loans are pretty much predatory lending. They gain interest by the day so in order to even make small gains toward getting out of debt you have to pay at least $400 per month if your debt is around $30,000. If you only had to pay back the amount you borrowed with a flat interest rate the student loan program wouldn’t be bad at all.

The epidemic of student loan crisis is an issue that is not discussed well in the parliament and no real solutions are being offered to the students. The older generation needs to understand that education is essential in today’s society and having a degree gives someone a head start in their career. The rising cost of studies is one of the issue that made students take up more loans as compared to before. Is there something that the government can do about it? I am sure they can like providing subsidiaries to students, lower interest rate, revising the course fees and many others. It is up to them to see if the future generations of the country is worth saving from this crisis. Much love.

I feel so old … I was paying a student loan at a rate of less than $2.50/month. But I’m not as senile as Congresswomann Virginia Foxx of North Carolina, who said a body ought to be thankful to earn $2.50/hour like she did on her first job. $15/hour seems like so very much (when I was a pup I earned about $5.35/hour, and that was damn good pay)–but I can understand times have changed. Nevertheless, I get the impression that college loans today are far, far more onerous than when I had one.

As a college graduate with massive debt, I feel like the debt crisis is a scheme. Yes, students borrow too much and dont finish college. Yet, I feel that my generation, Im 28, was pushed towards college and nothing else. They never emphasized trade or vocational schools. Also, I feel that employers intentionally don’t hire college graduates, but will employ older people who are less skilled, as a means of holding on to power. sorry for the rant. Great post.